We explore the asset pricing implications of an investment-based model that features a stochastic technology frontier and costly technology adoption. Firms adopt the latest technology embodied in new capital to reach a stochastic technology frontier, but this decision entails an adoption cost. The model predicts that old capital firms are more risky and hence offer a higher return than young capital firms. This is because old capital firms are more likely to upgrade their capital in the near future and hence are more exposed to shocks driving the technology frontier. Our empirical analysis supports the model’s predictions. We find an annual return spread of 7% between old and young capital firms. The CAPM fails in explaining this return spread.
Labor Rigidity and the Dynamics of the Value Premium
Collegio Carlo Alberto
Discussant(s): Philipp Illeditsch (University of Pennsylvania)
This paper documents that (i) the labor-share is a strong predictor of both the value and duration premia, (ii) these premia are highly correlated, and (iii) the labor-share does not forecast the component of the value premium orthogonal to the duration premium. A simple equilibrium model with labor rigidity and heterogeneity in cash-flow durations rationalizes these stylized facts. The economic channel is a term-structure effect: labor rigidity boosts short-run dividend risk because wages are more responsive to permanent than transitory shocks. This leads to downward-sloping equity risk and to a cross-sectional duration premium. In turn, value firms earn a compensation over growth firms which is predicted by labor-share variation.
Asset Collateralizability and the Cross-Section of Expected Returns
Jun Li1, Hengjie Ai2, Kai Li3, Christian Schlag1
1Goethe University Frankfurt; 2University of Minnesota; 3Hong Kong University of Science and Technology
Discussant(s): Adrian Buss (INSEAD)
This paper studies the implications of credit market frictions on the cross-section of stock returns. In an economy with credit frictions, the tightness of constraint is countercyclical. As a result, collateralizable capital which can relax financial constraint in economic downturns, provides insurance against aggregate shocks, therefore this type of capital demands lower returns. We present a production-based general equilibrium model to quantify the effect of this mechanism on the cross-section of expected returns, where firms are subject to collateral constraint. Consistent with the predictions of our model, we find that in the data firms with more non-collateralizable capital have average annualized returns that are 4.8% higher than firms with more collateralizable capital.